The potential impact of debt on inflation depends on the response of monetary policy. High government debt could well constrain the ability of the central banks to set the policy rate to control inflation. This is the “fiscal dominance” view. Heavily debted governments force the central bank to accept inflation in order to reduce the real value of their debt. Historically, inflation has helped governments to reduce their public debt burdens. In the case of the United Kingdom, the unexpectedly sharp rise in inflation in the late 1960s and early 1970s reduced debt/GDP ratios significantly. Most of the crises.
